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After the G7 finance ministers’ meeting (a group that includes the major western economies of the United States, Germany, France, the United Kingdom, Italy, Canada and Japan), an agreement was reached to establish a 15% global corporate tax
The agreement was reached after several months of negotiation and a prolonged pandemic pause, something that U.S. Treasury Secretary Janet Yellen welcomed, claiming that “a global minimum tax would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the U.S and around the world”.
The proposal for a corporate minimum tax is not new. In fact, the United States has had a 10% minimum tax on corporations since 2017, put in place by former President Trump’s Tax Cuts and Jobs Act. The increase proposed by Yellen would effectively only be 5%.
Some European countries such as France and Spain already have a corporate tax on sales in their country. However, this is the first time a global corporate tax is being attempted.
Why does the U.S. want a 15% global corporate tax?
The global corporate tax proposed at the G7 and pushed by Yellen is specifically intended to curb tax avoidance, mainly by tech companies like Google and Amazon.
While a normal brick-and-mortar company needs to have a corporate presence in the country where it operates and generates taxes, digital companies like Google and Facebook can operate in any country in the world that has internet access and pay nothing on taxes.
The 15% global tax initiative seeks to prevent just that, by taxing mainly technology companies that can have millionaire revenues in hundreds of countries around the world and do not pay a single tax on profits.
If the United States implements this tax unilaterally, it could discourage these technology companies to remain in America and they would move their headquarters to another country. With a global tax, this would no longer be a problem, since in principle these technology companies would have to pay this corporate tax regardless of where they are located.
Although the effects of a 15% global tax are still unknown, it could strongly impact a large number of U.S. companies whose revenue sources depend as much as 50% on sales in foreign countries.
European companies could potentially be less affected, as their sales are more concentrated in Europe and they are already accustomed to paying tax rates above 21%.
Countries such as Ireland, which has a corporate tax rate of 12.5%, could be affected by the measure. An increase in the tax rate might discourage investment in this country, should it be implemented.
Ironically, the lower the proposed global tax the more it will affect tax havens such as the Cayman Islands or the Virgin Islands. As the tax becomes lower, it will have greater international support, which could discourage many companies from establishing their Headquarters in these tax havens.
According to The Wall Street Journal, one negative aspect that a global corporate tax could bring is that companies will increase their debt levels to operate and increase their dependence on credit to finance their operations since debt is tax-deductible for accounting purposes.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica